More people are now surrendering life insurance before maturity. What’s driving this?

Blame it on financial stress or mis-selling by insurers — surrenders and withdrawals of life insurance policies before maturity have been increasing over the past five years.

Payouts for surrenders and withdrawals increased from around 30% of total benefits paid to policyholders in FY2022 to 38.3% in FY2026, suggesting that a growing number of policyholders are exiting their policies before maturity.

In contrast, policyholders who completed the full policy term declined from about 48% in 2021-22 to 36.9% in 2025-26, according to data from insurance regulator IRDAI (Insurance Regulatory and Development Authority).

This means the number of policyholders exiting mid-way through the policy tenure is rising faster than those who complete the policy tenure. “This could be due to mis-selling by insurers or financial constraints or stress of policyholders. This is not an ideal situation as policyholders won’t get the full benefit when they exit mid-way. They could even make losses,” said an insurance official.

In 2025-26, life insurers paid total benefits of Rs 7.3 lakh crore to policyholders, according to IRDAI data. As much as 38.3% of this is surrender/withdrawal, leading to premature payout of Rs 2.8 lakh crore during the financial year. When compared to this, maturity benefit paid by insurers after completing the full term is Rs 2.69 lakh crore.

What’s leading to premature exits?

According to insurance experts, many families have surrendered traditional life insurance policies to meet immediate cash needs due to inflation, rising living costs and higher loan repayments in recent years. Some customers purchase policies expecting short-term investment or FD-like returns, but discontinue them after realizing later about the long lock-in period and surrender penalties. Further, higher interest rates on bank FDs, stock market and mutual fund investments have become more attractive, prompting many customers to move away from insurance policies that offered comparatively lower returns, they say.

“The near parity between surrenders and maturity payouts indicates that policyholders are increasingly exiting policies prematurely. This shift has direct implications for asset-liability management (ALM), as early exits disrupt the long-duration assumptions underpinning life insurance investment strategies and can force asset liquidation ahead of schedule,” the RBI’s Financial Stability Report (FSR) says. Persistently elevated surrender rates also signal policyholder dissatisfaction, product mis-selling, or competitive pressure from alternative financial instruments, it says. RBI and IRDAI had repeatedly warned against mis-selling by banks and NBFCs.

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While the insurance sector remains broadly resilient, several underlying structural pressures exist from a financial stability perspective. Sustained premium expansion has strengthened the sector’s ability to absorb shocks. However, elevated surrender behaviour in life insurance points to weaker policy persistency and introduces uncertainty in asset-liability management, RBI’s FSR says.

Net incurred claims rise

Net incurred claims in the general insurance segment rose from Rs 1.4 lakh crore in 2021-22 to Rs 2.1 lakh crore in 2025-26, an increase of nearly 50% over five years, according to the IRDAI data.

Net claims paid is the amount paid to policyholders after accounting for any recoveries such as reinsurance.

This reflects rising frequency and severity of loss events, particularly in health and motor lines, which together constitute 95.3% of net incurred claims in 2025-26, IRDAI data shows. Health insurance claims have grown to 55% of total net incurred claims, driven by medical inflation, rising hospitalisation rates and expanding coverage. Motor claims account for 40.3%.

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The concentration of claims in these two segments creates correlated and structurally growing loss exposure that may strain reserving adequacy and underwriting margins, if not continuously recalibrated.

Underwriting losses high

PSU general insurers continued to post the largest underwriting losses throughout the last five-year period, widening to Rs 31,000 crore in 2025-26 as against Rs 10,000 crore in the case of private insurers, IRDAI data shows.

Private insurers also remained in underwriting losses, though at a much lower level of Rs 7,000-10,000 crore annually. Specialised insurers recorded underwriting profits of Rs 3,000-5,000 crore between 2022-23 and 2024-25 before breaking even in 2025-26, while standalone health insurers (SAHI) posted relatively modest underwriting losses of Rs 2,000-3,000 crore over the five-year period.

In insurance parlance, an underwriting loss occurs when an insurer pays out more in claims and underwriting-related expenses than it earns from premiums during a given period. In other words, the insurer’s core insurance operations are unprofitable because the total cost of settling policyholders’ claims, paying commissions to agents and covering administrative and operating expenses exceeds the premium income collected from policyholders.

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However, an underwriting loss does not necessarily mean the insurer is operating at an overall loss as investment income from premiums invested in stocks, bonds or other assets may offset the underwriting deficit.